Tom Lee Warns Crypto Market Makers Face Liquidity Holes later than $20B Crash

What Triggered Crypto’s Latest tradeoff?

A record $20 billion in liquidations from the Oct. 10 crash may have created deep balance-sheet holes across major market-making firms, according to Tom Lee, chairman of BitMine and co-founder of Fundstrat. Speaking on CNBC, Lee said the liquidation shock “really crippled market makers,” reducing their ability to provide liquidity and forcing them to shrink activity.

Lee argued that many market makers entered the crash with limited capital buffers. When the liquidation wave hit, several firms were caught off-guard and “went reflexively into survival mode.” The result, he said, was a weeks-long cycle of deleveraging.

With reduced revenue from traders, fewer active hedges and less inventory financing, market makers have been “tradeing into fragileness” to protect capital positions. Lee described the process as a feedback loop: falling prices trigger more tradeing, which leads to further balance-sheet tightening.

He compared their function in crypto to a monetary authority. “Market makers are critical in crypto because they provide liquidity. They act almost as the central bank in crypto,” he told CNBC.

BTC traded above $121,000 before the crash and has since fallen to around $86,900. Most of the market followed the identical trajectory.

Investor Takeaway

Why Market Maker Stress Still Matters

Lee believes the crypto market may face “another couple of weeks” of unwinding before liquidity conditions normalize. He pointed to a similar sequence in 2022 that took eight weeks to flush out. By comparison, the current downturn is only six weeks old.

He suggested may again act as leading indicators for equities, as liquidity stress tends to ripple outward. The fragileened market depth has coincided with a risk-off shift in global markets, sharp drops in AI-linked stocks and a jump in the .

Other market analysts echoed Lee’s concerns. Tony Sycamore of IG described the environment as “dislocated” and “fractured,” with price swings amplified by thin order books.

Risk appetite deteriorated further on Friday, with BTC falling 2.1% to a seven-month low of $85,350. Ether slid more than 2% to $2,777, its fragileest level in four months. Combined, BTC and ether are down more than 8% on the week.

In total, about $1.2 trillion in has evaporated over the past six weeks, according to CoinGecko.

Global Markets Add to the Pressure

Friday’s downturn aligned with a broad flight from risk assets. Bets on near-term faded, and high-growth tech stocks saw heavy tradeing. Crypto, often used as a leveraged gauge of risk appetite, reacted violently.

Hong Kong-listed — including funds from China AMC, Harvest and Bosera — fell roughly 7% each. The tradeoff extended across correlated equities as well, hurting companies that hold large BTC treasuries.

Shares of Strategy (MSTR), once the flagship stock for BTC accumulation, fell 11% for the week and hit one-year lows. Metaplanet, Japan’s high-profile BTC adopter, has dropped nahead 80% from its June peak.

In its latest research note, CryptoQuant called current BTC conditions “the most bearish since the bull cycle began in January 2023,” saying the market has likely exhausted most of its demand wave.

Investor Takeaway

How Long Could This Liquidity Drain Last?

Lee views a potential turning point once balance-sheet gaps are filled. Market makers may gradually rebuild capital, restore trading volumes and tighten spreads, reversing the forced-tradeing cycle. Historically, these liquidity shocks resolve quicker in crypto than in traditional assets, but the scale of October’s liquidation makes the timeline uncertain.

Key factors to watch:

• Market-maker inventory levels: Signs of stabilization would indicate reduced forced tradeing.
• ETF outflows: If outflows sluggish, spot liquidity could improve.
• Funding rates: Excessively negative levels would show persistent stress, while normalization signals balance-sheet recovery.
• Correlation with tech stocks: Heavy AI-stock tradeing remains a key risk for broader sentiment.

For now, the market is still digesting the shock from October’s cascade. The coming weeks will reveal whether liquidity re-enters the system — or whether the unwind continues deeper into December.